Best of the Week
Most Popular
1. Will Gold Price Breakout? 3 Things to Watch… - Jordan_Roy_Byrne
2.China Invades Saudi Oil Realm: PetroDollar Kill - Jim_Willie_CB
3.Bitcoin Price Trend Forecast, Paypal FUD Fake Cryptocurrency Warning - Nadeem_Walayat
4.The Stock Market Trend is Your Friend ’til the Very End - Rambus_Chartology
5.This Isn’t Your Grandfather’s (1960s) Inflation Scare - F_F_Wiley
6.GDX Gold Mining Stocks Fundamentals - Zeal_LLC
7.US Housing Real Estate Market and Banking Pressures Are Building - Chris_Vermeulen
8.Return of Stock Market Volatility Amidst Political Chaos and Uncertain Economy - Buildadv
9.Can Bitcoin Price Rally Continue After Paypal Fake FUD Attack? - Nadeem_Walayat
10.Warning Economic Implosion on the Horizon - Chris_Vermeulen
Last 7 days
Stock Market Predictive Modeling Is Calling For A Continued Rally - 22nd Apr 18
SWEATCOIN - Get PAID to WALK! Incentive to Burn Fat and Lose Weight - Review - 22nd Apr 18
Sheffield Local Elections 2018 Forecast Results - 22nd Apr 18
How Long Does it take for a 10%+ Stock Market Correction to Make New Highs - 21st Apr 18
Sheffield Ruling Labour Party Could Lose 10 Council Seats at May Local Elections - 21st Apr 18
Crude Oil Price Trend Forecast - Saudi Arabia $80 ARAMCO Stock IPO Target - 21st Apr 18
Gold Price Nearing Bull Market Breakout, Stocks to Follow - 20th Apr 18
What’s Bitcoin Really Worth? - 20th Apr 18
Stock Market May "Let Go" - 20th Apr 18
Overwhelming Evidence Against Near Stock Market Grand Supercycle Top - 20th Apr 18
Crude Oil Price Trend Forecast - Saudi's Want $100 for ARAMCO Stock IPO - 20th Apr 18
The Incredible Silver Trade – What You Need to Know - 20th Apr 18
Is War "Hell" for the Stock Market? - 19th Apr 18
Palladium Bullion Surges 17% In 9 Days On Russian Supply Concerns - 19th Apr 18
Breadth Study Suggests that Stock Market Bottom is Already In - 19th Apr 18
Allegory Regarding Investment Decisions Made On Basis Of Government’s Income Statement, Balance Sheet - 19th Apr 18
Gold – A Unique Repeat of the 2007 and How to Profit - 19th Apr 18
Abbeydale Park Rise Cherry Tree's in Blossom - Sheffield Street Tree Protests - 19th Apr 18
The Stock Market “Turn of the Month Effect” Exists in 11 of 11 Countries - 18th Apr 18
Winter is Coming - Coming Storms Will Bring Out the Best and Worst in Humanity - 18th Apr 18
What Does it Take to Create Living Wage Jobs? - 18th Apr 18
Gold and Silver Buy Signals - 18th Apr 18
WINTER IS COMING - The Ongoing Fourth Turning Crisis Part2 - 18th Apr 18
A Stock Market Rally on Low Volume is NOT Bearish - 17th Apr 18
Three Gold Charts, One Big Gold Stocks Opportunity - 17th Apr 18
Crude Oil Price As Bullish as it Seems? - 17th Apr 18
A Good Time to Buy Facebook? - 17th Apr 18
THE Financial Crisis Acronym of 2008 is Sounding Another Alarm - 16th Apr 18
Bombs, Missiles and War – What to Expect Next from the Stock Market - 16th Apr 18
Global Debt Bubble Hits New All Time High – One Quadrillion Reasons To Buy Gold - 16th Apr 18
Will Bitcoin Ever Recover? - 16th Apr 18
Stock Market Futures Bounce, But Stopped at Trendline - 16th Apr 18
How To Profit As Oil Prices Explode - 16th Apr 18
Junior Mining Stocks are Close to Breaking Downtrend - 16th Apr 18
Look Inside a Caravan at UK Holiday Park for Summer 2018 - Hoseasons Cayton Bay Sea Side - 16th Apr 18
Stock Market More Weakness? How Much? - 15th Apr 18
Time for the Gold Bulls to Show their Mettle - 15th Apr 18
Trading Markets Amid Sound of Wars - 15th Apr 18
Sugar Commodity Buying Levels Analysis - 14th Apr 18
The Oil Trade May Be Coming Alive - 14th Apr 18

Market Oracle FREE Newsletter

Trading Lessons

Can Oil-Stocks-to-Oil Ratio Tell Us Crude Oil Price Future Moves?

Commodities / Crude Oil Nov 21, 2013 - 02:02 PM GMT

By: Nadia_Simmons

Commodities

In our essay on oil stocks from Nov. 14, we focused on the connection between the XOI and the general stock market to find out what impact the S&P500 index could have on the oil stock index's future moves. Back then, we also wrote about the relationship between the oil stocks and crude oil:

(...) crude oil has remained in the narrow range, but yesterday it climbed above $95. What's interesting, at the same time the XOI increased slightly above an important resistance. Although they moved in the same direction after weeks of negative correlation, this positive correlation might be just another temporary phenomenon - especially when we factor in the weekly outlook.


Taking the above into account, we've decided to comment on the relationship between them. Let's take a look at the chart below (charts courtesy by http://stockcharts.com).

Light Crude Oil Weekly Chart

When we take a look at the above chart and compare the price action in both cases, we clearly see that oil stocks were stronger in the previous week. They bounced off the bottom of the recent corrective move, pulled back and approached the 2013 high on Friday. What happened with the price of crude oil at the same time? Light crude declined once again and reached a new monthly low of $92.51. On top of that, on Monday the oil stock index climbed up once again and hit a fresh annual high. Meanwhile, crude oil lost almost 1% and declined to slightly above the November low. This price action clearly showed its weakness in relation to oil stocks.

Once we know the current relationship between crude oil and oil stocks, let's take a closer look at the oil-stocks-to-oil ratio. Today, we begin with the long-term chart.

XOI/WTIC Monthly Chart

The first thing that catches the eye on the above chart is a strong negative correlation between the ratio and the price of light crude. When we go back to 2008, we clearly see that the annual high in crude oil was in perfect tune with the ratio's 2008 low. We could see this strong reltionship also in 2009, when the annual low in crude oil corresponded to the ratio's 2009 high (marked with a red ellipse). In the following months, the ratio declined heavily, which led to higher oil prices.

What's interesting, the ratio's 2010 high was in tune with the bottom of the corrective move that we saw in crude oil. We noticed similar price action in September 2011, May, August and October 2012, and February and May 2013.

Looking at the above chart, we see that the ratio remains in the gap between the April 2009 low and May 2009 high (marked with the red rectangle). In all previous cases, such a position of the ratio triggered a correction, which resulted in higher prices of light crude. Additionaly, the ratio has approached the 38.2% Fibonacci retracement level (based on the entire 2009-2011 decline), which is a strong resistance level.

Taking the above into account, if history repeats itsef once again and the ratio declines, we will likely see the bottom of the current correction.

Now, let's zoom our picture and examine the weekly chart.

XOI/WTIC Weekly Chart

Looking at the above chart, we see the same price action - most of the ratio's tops have corresponded to the crude oil's lows. Additionally, the RSI has moved above the 70 level. We saw such situations in 2008, 2011 and again in 2012. Back then, such a high reading on the RSI preceded a move down in the ratio and an upward move in crude oil. If history repeats itself once again, we may see a pullback in crude oil in the near future.

When we factor in the position of the CCI, we clearly see that the indicator is extremely overbought, which is another bearish signal for the ratio.

Now, let's check the short-term outlook.

XOI/WTIC Daily Chart

On the above chart, we see that the ratio has rallied since September, which is in perfect tune with declines in crude oil. In the recent days, the ratio has moved higher once again and hit a new 2013 high. Despite this increase, we haven't noticed a new high in case of the RSI. When we take a closer look at the above chart, we clearly see a negative divergence between the ratio and the position of the indictor.

At this point, it's worth mentioning that there were similar situations in the past - for example in June and October 2012. Back then, such divergences preceded declines in the ratio and had a positive impact on crude oil.

Please note that earlier this year, lower readings on the RSI triggered downswings in the ratio and indicated the bottoms of correction moves. Taking the above facts into account, we can assume that the final bottom of the current correction is just around the corner.

Summing up, the oil-stocks-to-oil ratio is oversold (not only on a short-term basis, but also from the medium-term perspective) as indicated by the RSI. Additionally, it has reached a strong resistance zone created by the gap between the April 2009 low and May 2009 high (marked with the red rectangle on the monthly chart) and reinforced by the September 2009 high, which may trigger a correction in the ratio and an upward move in crude oil in the near future.

Thank you.

Nadia Simmons

Sunshine Profits‘ Contributing Author

Oil Investment Updates
Oil Trading Alerts

* * * * *

 

Disclaimer

All essays, research and information found above represent analyses and opinions of Nadia Simmons and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Nadia Simmons and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Nadia Simmons is not a Registered Securities Advisor. By reading Nadia Simmons’ reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Nadia Simmons, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.


© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules